MNI RBA WATCH: Changed Messaging Considered In Hawkish Hold

MNI (SYDNEY) - The Reserve Bank of Australia Board considered a change to its messaging on the future path of its cash rate and did not explicitly discuss hiking, Governor Michele Bullock told reporters on Tuesday following the Board’s call to hold at 4.35%. 

“The Board did discuss whether or not the messaging should change,” she said. “We didn't explicitly consider an interest rate rise, because the framing of the discussion was what has changed since last time and the assessment was not enough, and it was mixed enough, for us not to change our view from last time.”  

The Board was clear that it did not see interest-rate cuts in the near term, despite the meeting’s altered format, she added. “So there wasn't an explicit alternative in the sense that I've talked about in the past,” she said.

The Board’s decision was largely anticipated, but did little to temper the market's belief that the RBA will cut at the December meeting, with overnight index swaps pricing in a 4.14% cash rate by the end of the year. (See MNI RBA WATCH: Board To Hold As Labour Market Remains Strong) The cash rate has been held at its current level since November 2023. 

INFLATION TARGETS

Bullock said underlying inflation remained sticky and cautioned against placing too much emphasis on headline data distorted by government cost-of-living subsidies. 

“We're not unusual in that services inflation remains sticky,” she added, pointing to similar patterns beyond Australia and the lingering impact of the pandemic.  

Noting recent poor GDP growth data, she said total demand had risen due to the resilient labour market and people spending their savings. 

“We are observing per capita consumption declining, but total demand, because we've got more people in the country, has been holding up. It's still not growing, but it's holding up better than per capita.”  

Australia added 509,800 people in the year to March, down from Q4 2023's peak but higher than average and forecasts, according to recent Australian Bureau of Statistics data. (See chart) 

PEER MOVES

Bullock said recent moves by other central banks to lower policy rates would not impact the RBA’s strategy, noting the Reserve had not hiked by as much as comparable economies. 

“Our disinflation hasn't been as marked as others, and our employment gains have held up,” she continued. “One of the challenges thinking about this is, how much signal do we take from overseas?" But Bullock said she does not believe that Australia's economy has diverged from peer countries.

Responding to suggestions the Reserve risked miscommunicating with the market, Bullock stressed the uncertainty contained within the RBA’s forecasts, particularly around the mid-point. “Inflation could be lower or higher, unemployment could be lower or higher. So we need to be alert. We need to be looking at the data, and we need to be able to respond when we see things maybe not turning out the way we think in either direction. The Board is doing its best to judge what is the right level of restrictiveness to keep.”

The RBA Board next meets Nov 4-5.